An S corporation is a corporation created by state law that has elected to be taxed under Chapter 1, Subchapter S of the Internal Revenue Code. While both an S corporation and a limited liability company, or LLC, have the benefit of pass-through entity taxation, maintaining the formalities of an S corporation is more difficult than maintaining an LLC. For this reason, the owners of an S corporation may find it desirable to convert to an LLC. While state laws vary, converting to an LLC requires the shareholders of an S corporation to ratify a plan of conversion and submitting an articles of conversion with the state agency responsible for registering business associations.
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Draft a plan of conversion. While state requirements for a plan of conversion vary, a conversion plan will generally include the name of the new LLC, the proposed articles of organization of the LLC and the way in which ownership of corporate stock will transfer to ownership of the LLC.
Vote on a plan of conversion. If the corporation has bylaws pertaining to a conversion vote, follow those provisions. Otherwise, state corporation statutes typically provide a default rule requiring approval of a majority of all classes of shareholders.
Obtain an articles of conversion form. Typically, the state agency responsible for registering business organizations will provide a form for converting a business organization.
Fill out the articles of conversion form. While state forms will vary, you will typically need to provide the name, registered agent and registered office for both your old corporation and new LLC. You will need to indicate the percentage by which all classes of shareholders approved the conversion plan. Depending on the state, you may also need to submit the conversion plan or keep it on file at the registered office of the LLC.
File the articles of conversion and the articles of organization for the LLC. While state fees vary, the fee for converting an S corporation to an LLC is between $50 and $200 (as of 2010). The fee for filing an articles of organization runs between $50 and $350.
Change the tax status of your converted LLC. After converting your S corporation to an LLC, you must inform the IRS of the conversion. You must fill out and file Form 8832 (See Resources) and indicate whether your LLC will be taxed as a corporation, partnership or sole proprietorship.
- Plan of conversion
- Articles of conversion form
- IRS Form 8832
References & Resources
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